The Trump storm sweeps across the globe, and the British pound unexpectedly becomes a safe haven
Due to the hawkish stance of the Bank of England and the political situations in the United States and Germany, the British pound unexpectedly became a safe haven. Investors are betting on a rebound of the pound, with institutions like JP Morgan and Crédit Agricole predicting an appreciation of the pound. The exchange rates of the pound against the US dollar and the euro are expected to end their consecutive declines, as market expectations for interest rate cuts weaken. Analysts expect the pound to rise to 1.31 against the US dollar and to 81 pence against the euro in the next six months
According to the Zhitong Finance APP, investors are betting on a rebound in the British pound, marking a sudden shift from just 10 days ago when the UK's massive spending budget intensified weeks of selling. Major banks, from JP Morgan Private Bank to Crédit Agricole, predict that the pound will appreciate further, with the Bank of England's hawkish tone and the political situations in the U.S. and Germany making the pound an unexpected safe haven. The GBP/USD exchange rate is expected to end its longest streak of declines in six years, while the GBP/EUR exchange rate is set to achieve its best week since 2024.
The pound appears to be a safe destination. Political turmoil has heightened concerns over Germany's large-scale bond purchases, and if the trade tariffs threatened by incoming U.S. President Donald Trump materialize, the UK's service-oriented economy may reduce its exposure.
Sam Zief, global foreign exchange strategy head at JP Morgan Private Bank, stated, "The UK is benefiting from a 'dull dividend' following events like the election and budget."
On Thursday, the Bank of England cut interest rates by 25 basis points but did not signal further easing, causing the pound to rebound nearly 1% from its lowest level since August. The pound has been under pressure since last September when Bank of England Governor Bailey hinted at significant rate cuts.
After the meeting, traders reduced their bets on rate cuts, with the likelihood of another 25 basis point cut in December estimated at 16%, down from around 25% on Wednesday.
Kirstine Kundby-Nielsen, a currency strategist at Danske Bank A/S, noted, "The political risk premium on the pound is fading again, especially as the Bank of England gradually cuts rates to soothe the market."
Budget Concerns
Although this move is temporary, following the UK's budget announcement last week, concerns over the country's fiscal sustainability overshadowed expectations of rising inflation, leading to a continuation of the pound's recent decline.
Kundby-Nielsen expects the GBP/USD exchange rate to rise to $1.31 in the next six months, while the GBP/EUR exchange rate is projected to rise to 81 pence. Crédit Agricole and Jefferies believe that a slower pace of rate cuts will help the pound perform better against the yen and other non-dollar currencies.
Signals from the options market also indicate that the pound will rise further. Risk reversals suggest that market sentiment towards the pound is recovering after hitting its most pessimistic level since March 2023 a week ago.
Meanwhile, traders familiar with the transactions say that leveraged investors buying GBP/USD call options have recently profited, and there is also corporate demand for buying GBP/EUR.
![英镑 2.png](https://img.zhitongcaijing.com/image/20241108/1731069694133203.png? Brad Bechtel, head of foreign exchange at Jefferies, believes that it is certainly not advisable to position oneself when the British pound strengthens against the US dollar. Bechtel stated that although the pound is in a "very different position" compared to other G10 currencies, concerns about the country's fiscal sustainability outweigh expectations of rising inflation, and there is still room for the dollar to rise.
Currently, political factors are supporting the pound. The collapse of the German ruling coalition and the possibility of early elections could lead to a change in governance, which would increase the issuance of German government bonds. Subsequently, due to the demand for British government bonds, the market's demand for the pound may increase. Trump has promised to impose tariffs on both allies and enemies, and the fact that the UK is the world's second-largest services exporter suggests to some that the British economy is less susceptible to trade restrictions.
Kathleen Brooks, head of research at XTB, stated, "The German elections are affecting market sentiment, and Trump is also influencing US government bonds. In the short term, the UK is the least unattractive sovereign bond."